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Financial Services Law Insights and Observations

Fed: Large banks “sufficiently capitalized” for Covid-19 stress

Federal Issues Federal Reserve Stress Test Dodd-Frank Covid-19

Federal Issues

On June 25, the Federal Reserve Board released the results of the Dodd-Frank Act stress tests for 2020 (DFAST 2020) and another report analyzing additional sensitivities due to the Covid-19 pandemic. The additional sensitivities report assessed the resiliency of large banks under three hypothetical recessions, which could result from the Covid-19 pandemic. Overall, under the hypothetical scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion in the sensitivity analysis, and aggregate capital ratios declined from 12 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent. The Fed concludes that due to strong current capital levels, “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios.” The Fed notes that this analysis did not incorporate the effects of government stimulus payments or expanded unemployment insurance. In response to the results, the Fed notes that all large banks are now required to, among other things, resubmit their capital plans later this year to reflect the current stresses, and the Fed intends to conduct additional analysis each quarter to determine if other response adjustments are needed.

Additionally, the results of the full DFAST 2020—which was designed prior to the Covid-19 pandemic—suggest that the 33 banks subject to the test would “experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis.”

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